Photo of the Day- Timothy Geithner

via Indecision

Not the time to be thinking of doing a PhD

Andrew Delbanco, the chairman of the American studies program at Columbia University, said that the system producing graduate students was increasingly out of sync with the system hiring them.

“It’s been obvious for some time — witness the unionization movement — that graduate students are caught between the old model of apprentice scholars and the new reality of insecure laborers with uncertain employment prospects,” Mr. Delbanco said. “Among the effects of the financial crisis will clearly be shrinkage both in graduate fellowships and in entry-level academic positions, so the prospects for aspiring Ph.D.’s are getting even bleaker.”

-Doctoral Candidates Anticipate Hard Times

A fisherman turned banker, now back to Fishing

Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.” His job, he says, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach him about currency trading,” he says, “than to take someone from the banking industry and teach them how to fish.”

He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”

It took years of training for him to become a captain, and even then it happened only by a stroke of luck. When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan says. “I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him, talking to him. I gave him all the respect in the world—it’s difficult to describe all he taught me. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school?”

This marvelous training was as fresh in his mind as if he’d received it yesterday, and the thought of it makes his eyes mist.

“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.

“Yes.”

“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”

“Yes.”

“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”

“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.” As I often think I know exactly what I am doing even when I don’t, I find myself oddly sympathetic.

“What, exactly, was your job?” I ask, to let him off the hook, catch and release being the current humane policy in Iceland.

“I started as a … “—now he begins to laugh—“an adviser to companies on currency risk hedging. But given my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other fishermen, and fishing companies, and they, like him, had learned that if you don’t take risks you don’t catch the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he says.

-Wall Street on the Tundra

New Rules for the Sub-prime Age- Bill Maher

Book recommendation

Anticipating Correlations: A New Paradigm for Risk Management
Robert Engle

Assorted

Letter from Birmingham Jail

The Origin of Singaporean Crime Policy

How Much Should Judges Make?

Chief Justice Roberts, in his report on the state of the judiciary at the end of 2006, cited a few kinds of data to support his argument that low pay is leading to a crisis. One was that 38 judges left the federal bench between 2000 and 2005, some citing the need to make more money.

Judge Richard A. Posner, a prominent federal appeals court judge in Chicago, called this “crying wolf” in his recent book, “How Judges Think.” The chief justice had lumped retirements and resignations together, Judge Posner said. Only 12 federal judges had resigned out of a total of 1,200 active and senior judges in the years in question, a small number in absolute terms and a smaller percentage than in the six years ending in 1974.

Judge Posner did not dispute that low pay may mean that there are fewer judges coming from private firms, but he did not see why that should matter so long as there appear to be plenty of qualified candidates.

Yes we can, Mr Geithner

Assorted Podcasts

Shakespeare Studies with Stanley Wells

What do Greta Garbo, Madonna and Napoleon have in common? Why Glamour, Darling!

Lipsky, Lanman Discuss European Central Bank's Challenges

Makin, Fischer Discuss Market Regulation, Global Economy

Credit Crisis, Risk Management Assessed One Year Later

Levy, McCulley, Lipsky, Lanman Discuss Economy, Fed

Roberts on the Price of Everything

Podcast of the Day

Pitt Says Raising Capital for Fannie, Freddie Is `In Jeopardy'
Harvey Pitt, former chairman of the U.S Securities and Exchange Commission, talks with Bloomberg's Tom Keene about the role of the SEC, the U.S. financial industry, and the outlook for Fannie Mae and Freddie Mac.

Who would you hire- an economist or a psychologist

Charlie Rose asks some of the best macroeconomists;

'If in fact you just simply want to make a lot of money,.. would you rather have a mind that is brilliant about the economy or would you rather have a mind that is brilliant about understanding human psychology'

Related;
Bubbles, entry in The New Palgrave Dictionary of Economics

Lectures and Talks

Reviving the Invisible Hand: the case for classical liberalism in the 21st century

Principles and Practice of Global Economic Governance
Prof. Jose Antonio Ocampo, former UN Undersecretary-General for Economic and Social Affairs, currently Professor in the Professional Practice of International and Public Affairs at SIPA, Columbia University

Understanding tribal warfare: Kenya

The Natural State
Prof. Douglass C. North

The Stuff of Thought: Language as a window into human nature

Public Diplomacy in the Twenty-First Century

Democracy and Autocracy in Eurasia: Georgia in Transition

Finance in East Asia: from crisis to integration - challenges of second generation reforms

Good Governance
Prof. Jobst Fiedler, Associate Dean, Hertie School of Governance

A discussion about the Federal Reserve
Markus Brunnermeier, Wei Xiong, Harrison Hong

Podcast of the Day

Nassim Taleb Says Crisis Continues Until Banks' Management Changes

Podcasts

The great grammar debate
Is learning formal grammar essential to becoming a good writer and communicator? Or is it more important to develop a feeling for language that can be applied in different contexts?

John Milton: 400 Years On

Restructuring secondary education

Being your own therapist - Buddhist style

Is being gay in your biology?

Cuba: socialism with salsa

Post traumatic stress disorder

Oral cancer

Why Most Published Research Findings Are False

Pole to Pole: A vet on the ice with seals

The Wallace-Darwin papers on biological evolution - 150 years ago

Buckminster Fuller

Chinese contemporary art

State-Building: Governance and World Order in the 21st Century

Goldman Says Economic Recovery Requires More Saving

Public Bailout of Bank’s Recklessness
In response to the ongoing sub-prime crisis, the recently published Crosby Report recommends that the Government uses public money to swap bank’s seriously damaged mortgage-backed securities for pristine government bonds. Matthew Watson from the Department of Politics and International Studies at Warwick University talks about these recommendations, and how the global ‘credit crunch’ is affecting Labour’s popularity with the electorate.

Chilli, Chocolate, and Chips: Foods that Originate from the New World

Assorted Economic Podcasts

Allan Meltzer Says Fed Failing to Control Inflation

Harvard's Feldstein Says Fed Slow to Recognize Credit Crisis

James Poterba Says U.S. Consumer `Likely' to Retrench

Macro Podcasts

Former Director Reinhart Says U.S. Asking Too Much of Fed

Parry Says Fed Is Facing `Serious' Policy Challenges

Related;
With Fannie and Freddie, is the government mistaking a ‘first-generation’ crisis for a ‘second-generation’ crisis?;

There are two main types of crises. In a “first-generation” or fundamentals-based crisis, investors choose to flee from a currency, or actively speculate against it, because they correctly recognize that the country’s policies will not support a fixed exchange rate forever. Leaving the fixed exchange rate regime is inevitable, but the timing can be forced by market participants when they sense the government’s vulnerability. In the corporate world, if a company’s debt service is so rickety that eventually it will become insolvent, investors will flee as soon as they realize that. They will not wait until the corporate cupboard is bare.

In a “second-generation” or self-fulfilling crisis, speculators are in the driver’s seat. A country’s resources might be sufficient to maintain an exchange rate peg indefinitely, as long as the country is not forced to pay an unduly high risk premium in markets. But if investors come to doubt its ability to defend the peg, those doubts become self-fulfilling and the risk premium balloons. In other words, the peg does not hold because investors doubt that it will.

Similarly, a company might be viable as long as it can roll over maturity debt. If investors trust the firm to be viable, it can access markets. However, if its survival comes into doubt, the markets will be shuttered and, eventually, so too will the firm.

Secretary Paulson has been working on the assumption that the travails of Fannie and Freddie stem from a self-fulfilling speculative attack: in other words, that this is a “second-generation” crisis. If that is true, those speculators can be beaten back by an overwhelming show of force. Thus, the Federal Reserve has thrown open its discount window to the GSEs and the Bush administration has sought from Congress an unlimited authority to lend to Fannie and Freddie. The Fed and the White House hope this will convince market participants that GSE debt will always be honored and that all maturing obligations can be rolled over at narrow spreads to Treasuries. The mere possibility of a massive governmental infusion of funds should squash the crisis of confidence without any need for disbursement.

Meanwhile, the Securities and Exchange Commission (SEC) has prohibited the “naked” short selling of the shares of certain financial firms, including those of Fannie and Freddie. (A naked short sale involves selling an equity you do not have in your possession.) In addition, the SEC is apparently becoming more aggressive in dealing with rumor-mongering among traders.

Again, the assumption is that the financial woes of the GSEs derive from speculative withdrawal rather than from weak fundamentals. But this assumption might be wrong. Fannie and Freddie are called the two housing giants for a good reason: they own or guarantee over $5 trillion worth of U.S. mortgages—more than half the market. Which means they have a large, under-diversified exposure to a sector that has plummeted.

Mistaking a “first-generation” crisis for a “second-generation” crisis is a lot like countersigning a loan for a relative who turns out to be feckless. Three unfortunate developments ensue.

Messages from Merrill’s Misfortunes;

Perhaps more firms will follow Merrill’s path and seek to raise new capital. But aggregate financial losses may wind up dwarfing private-sector resources. In that case, the health of the U.S. economy may require an injection of government funds into the financial sector. One lesson of the savings-and-loan debacle of the late 1980s—and also a lesson of banking crises worldwide—is that delaying such a government capital injection will raise the overall tab. With federal resources already stretched thin and many national priorities unfulfilled, the idea of sinking still more money into large financial firms seems distasteful. But we must accept the fact that our national economy is hostage to the financial system.

Repel the calls to contain competitive marketsBy Alan Greenspan

The News you need

It's the Economy Stupid


Obamania

The State of the Economy in photo

U.S. Considers Takeover of Two Mortgage Giants

Dilemmas for Politicians in Financial Crisis

Kemal Dervis writes;

The events leading to the Turkish crisis of 2001 include a similar story of “surge and drought.” At the beginning of 2000, Turkey embarked on a new IMF-supported program featuring a preannounced crawling peg exchange rate regime that would give way to a more flexible “widening band” regime after 18 months. The objective was to defeat chronically high inflation, which had averaged close to 70 percent in the 1990s, and to regain debt sustainability that was threatened by the very high real interest rates that had prevailed for years. The program got off to a good start, as markets “believed” the preannounced path of the nominal exchange rate would be followed, at least for a while. With risk premia declining, short-term capital flowed into Turkey, taking advantage of th large exchange rate depreciation-adjusted interest rate differentials. The current account deficit widened dramatically by the summer of 2000 without much worry in the financial markets, for inflation was indeed declining rapidly, although not rapidly enough to avoid a significant appreciation of the real exchange rate. The Turkish economy could possibly have digested the real appreciation, at least during the 18-month period for which the exchange rate path was to remain rigid and preannounced, had it not been for serious weaknesses in the banking system translating into large contingent liabilities for the government. The combination of the large current account deficit and the underlying fiscal weakness led to attacks on the Turkish lira first in November 2000 and then again in February 2001. Just as some Asian countries had to give in to overwhelming market pressure, Turkey too had to abandon the exchange rate regime and let the lira float, leading to a massive devaluation in the early spring of 2001. Private short-term capital that had provided an inflow of about 5 percent of GDP in 2000 changed direction, with outflows totaling about 7 percent of GDP in 2001!...

Many policymakers have contemplated imposing higher taxes on wealth or high incomes when confronted with the need to “find” another 1 or 2 percent of GDP to meet a “strengthened” primary surplus target at the onset of a macroeconomic crisis triggered by debt event fears. I lived through a typical example of this in Turkey at the peak of the 2001 crisis. We had agreed with the IMF in March 2001 on a new and more ambitious primary surplus target of 5.5 percent of GDP and were trying to put together a revised budget that would meet this target. The distribution of income in Turkey is highly unequal, and the pending decline in GDP and employment due to the crisis was going to hurt the poor and threaten many jobs. It would have been very desirable, for equity and social cohesion, to derive greater tax revenue from the rich. The problem is that, in a crisis situation, one needs revenue quickly and cannot wait for the results of a comprehensive tax reform. We considered an income tax surcharge, a tax on liquid wealth, and a windfall gains tax, because many investors that had held foreign exchange before the onset of the crisis had made spectacular gains due to the collapse of the Turkish currency. In the end, we decided reluctantly, however, that any significant measure of that type would accelerate capital flight and increase the degree of panic that was already our biggest problem. We did try, using an amendment added to a bill in Parliament around midnight, to increase the deposit insurance “tax” received on deposits in the banking system, but we failed even at that because of the defection of a group of government deputies during the midnight vote. In the end, there was an increase in the value added tax, increases in taxes on tobacco, alcohol and fuel, and many increases in administered prices. The budget targets had to be met, as usual, by increasing the effective tax burden on the middle- and lower income groups. We tried to compensate this by direct income support programs to the poorest sections of the population. The 2002 data published by the State Institute of Statistics suggest that we had some success. But we could not impose new taxes on the rich at the height of the crisis. It would have led to a further acceleration of capital flight and would have ended up hurting the country and the poor through a deepening of the crisis.

Related;
How to Save Globalization from its Cheerleaders, Dani Rodrik

India Development Fact of the Day

India is foregoing as much as 2% of its GDP by accumulating reserves instead of employing resources in alternative uses

-Cost of Holding Excess Reserves: The Indian Experience

Related;
An Account of India’s Growth

Structural Reforms in crisis times

Any attempt to deal with the full range of structural changes while also trying to manage a short-term recovery from the crisis put severe strains on government competence that made economic recovery and foreign debt negotiations more difficult.

-Martin Feldstein critiquing IMF on response to the Asian Financial Crisis of 1997

Be very scared says IMF

Credit Crisis Is Broadening;

Credit deterioration, which was first evident in the U.S. subprime market, is now showing up in higher-quality residential mortgages, U.S. commercial real estate, and the corporate debt markets, according to the GFSR. These concerns are further exacerbated by a drop in valuations of structured credit products and a dramatic drying up of market liquidity.

Uncertainty about the size and distribution of bank losses, reduced capital buffers, and the normal reduction in credit as the cycle turns are also likely to weigh heavily on household borrowing, business investment, and asset prices. This, in turn, would affect employment, output growth, and balance sheets—thereby creating worrying macroeconomic feedback effects.

This feedback dynamic is potentially more severe than in earlier credit cycles, as it was fueled by a proliferation of new credit products that allowed more people to obtain credit, the report said. "Thus, it is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities, which means its effects are likely to be broader, deeper, and more protracted," it added.

Global Financial Stability Report interview